As reported in the NY Times today:
"The latest sign (of a strong recovery ) emerged Tuesday as the Standard & Poor’s Case-Shiller home price index posted the biggest gains in seven years. Housing prices rose in every one of the 20 cities tracked, continuing a trend that began three months ago. Similar strength has appeared in new and existing home sales and in building permits, as rising home prices are encouraging construction firms to accelerate building and hiring.
The broad-based housing improvements appear to be buoying consumer confidence and spending, countering fears earlier this year that many consumers would pull back in response to government austerity measures.
The Case-Shiller 20-city composite index rose 10.9 percent over the last year, the biggest increase since April 2006. Several cities — Charlotte, N.C.; Los Angeles; Portland, Ore.; Seattle; and Tampa, Fla. — had their largest month-over-month gains in more than seven years. The inventory of homes available on the market remains unusually low, thanks to little new building in the last few years and the large number of homeowners who are still underwater on their mortgages, making them reluctant to sell at a cash loss.
Now there are signs that higher prices are beginning to encourage some would-be sellers to come off the sidelines and place their homes on the market. That could be healthy for the market, countering concerns that housing might become overvalued again.
“You’ve had this dynamic that has been favorable for price increases now, but it’s also favorable for supply to come back on market, so that will mean some moderation in the pace of price increases,” said Daniel Silver, an economist at JPMorgan Chase, who said that he expected home prices to continue growing but not necessarily at the double-digit rate seen in May.
Construction has been picking up, too, in response to the rise in home prices, but builders cannot bring homes to the market as quickly as buyers want them.
“You really need new construction to get rid of the shortages, but it takes seven months between the time when they take out a permit and when the builder actually completes the home,” said Patrick Newport, an economist with IHS Global Insight.
Also pushing up home price measures are the declines in distressed sales — that is, foreclosures and short sales. Homes in foreclosure typically sell at bargain-basement prices, which depresses the overall price levels reported. Now the composition of homes sold includes fewer sales at the depressed prices that bring down the overall numbers, said Michael Gapen, senior United States economist at Barclays Capital. The decline in distressed sales and so-called shadow inventory (homes that are behind on mortgage payments or in foreclosure, but not yet on the market) had been pushing up prices, Mr. Gapen said, but that upward pressure will fade over time.
Finally, home prices in many areas experienced severe, unsustainable plunges during the recession. The recent increases are coming off a very low base, so the growth looks strong even if the level of prices is still well below the peaks of the housing boom in the middle of the decade.
“Some of the areas with the largest declines in house prices during the crisis have shown the strongest increases in prices more recently,” Mr. Silver said. In Phoenix, for example, home values have risen 22.5 percent from a year earlier; Las Vegas posted a 20.6 percent gain.
Economists generally expect home prices to continue rising, particularly as the economy improves and more young people move out of their parents’ homes and into homes of their own. And many dismiss concerns of a potential bubble, not only because household formation is growing but also because housing prices remain well below their highs. Even after 10 straight months of year-over-year gains, the 20-city Case-Shiller composite price index is 28 percent below its previous peak in July 2006, which is probably a good thing.
“Talk of a house price bubble seems premature,” said Ed Stansfield, an economist at Capital Economics. “In relation to incomes, rents or their own past, U.S. home prices still look low.”
What’s more, credit is still hard to come by. The Federal Reserve has pushed interest rates down about as far as they can go, but many people who want to buy are still finding it difficult to get a home loan.“We usually think of bubbles as being driven by extremely easy credit, with people borrowing more than the outstanding value of the house and making little to no down payment,” said Mr. Gapen. “That’s not the case with credit standards today.”
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